Discount rate: Impact of rate hikes to sharply increase banks’ margins

Banks are expected to post high net interest margins due to near-full pass-through from the Reserve Bank of India’s policy rate hike under the External Benchmark Lending Rate (EBLR) regime.

They passed on the entire 90 basis point increase in the RBI repo rate to their lending rate, making home loans, car loans, personal loans and MSME loans costly for borrowers.

The EBLR is tied to the RBI repo rate. The other system used by banks to determine rates, the lending rate based on the marginal cost of funds (MCLR), is decided internally by banks based on their cost of funds, including deposit rates in vigor.

“Unlike previous bull cycles … the sustained pace of rate normalization is accretive for banks in the near term, especially given early-stage monetary transmission,” said Krishnan ASV, Institutional Research Analyst, Securities. “Given the frenetic pace of rate normalization, we expect the transmission on the MCLR wallet to lag significantly behind the transmission on the EBLR wallet, both in terms of quantum and timing.”

According to Krishnan,

and are best placed to capitalize on this stage of the rate cycle. ICICI Bank has 48% of its loans tied to EBLR and 22% to MCLR. For , it is 34% and 41%, respectively.

Pushed by the RBI, banks have been gradually migrating their loan portfolios to EBLR-linked loans, with almost 40% of loans in retail segments anchored at the repo rate. The major private banks currently have 35-50% of their loan portfolio linked to EBLR, with a three-month reset clause. Of all bank loans, 20-30% are currently based on MCLR and 40% on EBLR.

“What we are looking at now is an accelerated normalization of the interest rate cycle; the abnormally low rates that were deserved due to Covid must return to normal have become abnormally low rates and high liquidity could lead to sub-optimal credit choices”,

said chief executive Sanjiv Chadha.

“I think most of the banks have increased their lending rates, the (interest rates) tend to go up,” said Shanti Ekambaram, group president – consumer banking at


According to a report by HDFC Securities, the revaluation on the deposit side of the balance sheet should occur gradually, given the excess liquidity in the system and healthy credit-to-deposit ratios. Banks have raised the price of their term deposits by almost 10 to 25 basis points in recent months, which should gradually be reflected in the additional cost of funds for banks.


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